For almost a year the FX benchmark allegations against the banks have been in the news, as well as regulator and internal bank investigations. Many asset managers use the fix to execute their FX trades. There have been stories that trading at the fix has seen somewhat smaller volumes (OTC markets do not have published volume figures).
What are some alternatives available to a manager that wants to avoid fix trading?
1) This article in FX Week (subscription) says that there is anecdotal evidence that some managers, but not many, have switched to using time slicing algorithms over the period around the fix. This allows a manger to establish how they want to trade to minimize the risk (e.g., time intervals and size) , rather than giving the entire trade to a bank to manage. This sounds like an attractive methodology for many managers, but for those not currently using algorithms, may take some time to implement. It requires time to learn about them, choose algos with which to execute as well as prepare operations and systems.
2) Execute trades with banks in the same fashion as non-fix trades currently, but at a time of day other than the fix. This avoids any potential manipulation and volatility from the fix. This would include such methods as phone and the online portals. Simplicity is the benefit but tracking error to the fix can be substantial.
What are some reasons to continue trading the fix in the same manner as it has been?
1) Confidence that there has not been any manipulation or that if there has, it will have stopped now that everyone is watching.
2) Legal constraints on particular funds require fix trading.
3) Tracking error being a bigger concern than achieving potentially better execution.
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